As hospital profits fall, executive pay soars

Keeping top talent takes big compensation, leaders say

The first of two parts on nonprofit compensation. Coming Monday: The number of charitable nonprofits has doubled in Middlesex County since 1995, leading to an broad array of executive compensation.

It has been a lean couple of years for the region's hospitals.

Drawn by the higher reimbursement rates that insurers pay to academic teaching hospitals, such as those in Boston, more physicians are affiliating themselves with those institutions. Patients are following, and so is the money.

Some community hospitals, including Lowell General Hospital and Emerson Hospital in Concord, saw profit margins drop by more than half from 2012 to 2014.

Other hospitals' financial indicators, like ratios of assets to liabilities, are also weakening, although none of the hospitals surrounding Greater Lowell is close to the dire straits that led to the closure of Steward's Quincy Medical Center or North Adams Regional Hospital in 2014.

As they look to weather those storms and protect their space in a rapidly changing health-care landscape, the boards of directors of the region's hospitals have doubled down on a key investment: their executives.

"Each organization has to make its own decisions about how it can best compete in the marketplace," said Gary Young, director of Northeastern University's Center for Health Policy and Healthcare Research.

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"Senior executives of hospitals and health-care systems -- there's a competitive market for that kind of talent ... some would say when organizations run into trouble, they need to spend more to get leaders."

The payment figures in this story represent total compensation, including salary, benefits and bonuses.

At Lawrence General Hospital, compensation paid to top non-physician administrators increased 41 percent from 2012 to 2014, according to tax documents. President and CEO Dianne Anderson, who heads the list, was paid a total package of $884,092 in 2014.

"Because we're resource-limited, compared to (academic) hospitals, we're even more dependent in these challenging times to bring in somebody who can manage risk," said Richard Santagati, chairman of Lawrence General's executive compensation committee. "It takes a different breed and there's real competition for these people ... and once you have them there, you want to keep them because there's a learning curve there that is unique to each hospital."

From 2012 to 2014, Lahey Health's non-physician executives saw a compensation increase of 36 percent. A large part of that increase was in the salary of Dr. Howard Grant, who was promoted from president and CEO of Lahey Clinic to president and CEO of the entire Lahey Health system. The system includes facilities throughout northeastern Massachusetts and southern New Hampshire. Grant received $1.7 million in 2014.

"Our executive compensation is comparable to the programs of other, similarly sized health networks and is reflective of the complex role of an executive leader at a leading health system," Lahey Health said in a statement.

Compensation also rose at Emerson Hospital, although the hospital declined to provide detailed payment breakdowns necessary to determine exactly how much it rose by. In 2014, several executives received retirement-plan payouts, which come every five years, that skewed the rate of payment increases. Including that once-every-five-years payment, worth an unknown amount, CEO Christine Schuster made roughly $1.1 million in 2014.

Lowell General Hospital's executives saw a slightly smaller increase during that three-year span, at 18 percent, although CEO Normand Deschene remains the highest-paid hospital executive in the region with a package worth $1.9 million in 2014. The hospital also pays the taxes on retirement benefits, which are worth hundreds of thousands of dollars, for Deschene and several other executives.

"Lowell General has weathered significant changes in the delivery of health care," Deschene said. "At a time when many hospitals have failed, it's very crucial and critical that we have very talented individuals to lead the hospital."

Deschene pointed to a recent Health Policy Commission report, which has been making waves in the industry, that singled out Lowell General as an example of a community hospital successfully addressing pressing issues like patient exodus.

Lowell General brings specialists from Boston to Greater Lowell through its partnership with Tufts Medical Center, Deschene said. This allows patients to get local care at a lower price; the hospital's data shows that more patients with complex conditions choose to go to Lowell General than many other community hospitals.

Emerson CEO Christine Schuster said her hospital has pushed a similar program to bring pediatric, prenatal and other specialists from Boston through an affiliation with Partners HealthCare.

"People's faith in their hospital isn't related to how much the CEO gets paid, it's related to the care they receive," Deschene said.

Formulating executive pay

One of the problems with the way executive compensation is set, according to Alan Sager, a professor of health law, policy, and management at Boston University, is that boards of directors think that exceptional pay equals exceptional leadership.

"We could ask people: If they didn't know how much other CEOs were paid, how much would they need to do the job?" Sager said.

"It's a very hard job," he added, but "the deck for 55 years has been stacked against community hospitals. Do you think if we had paid our CEOs more in the '60s, '70s, '80s and '90s we'd have more (hospitals that survived)? I don't think so."

Thirty-one hospitals in the state closed or were converted into other facilities since 1980, according to the Massachusetts Hospital Association.

Like many large organizations, hospitals do have pay-for-performance systems in place, in which bonuses are awarded if the institution or a particular executive meets certain benchmarks.

Burlington-based Lahey Hospital and Medical Center was the star financial performer in the region from 2012 to 2014.

As a teaching hospital affiliated with a broader health system, it has several advantages over smaller local competitors. It turned a $67 million profit in 2014 and its 8.1 percent operating margin -- the difference between what it was paid to treat patients and what it spent treating them -- was among the best in the state.

From 2012 to 2014, though, Lahey paid $713,250 in bonuses and incentives to its non-physician executives, less than any of its regional competitors. The majority of that, $360,750, went to Grant in 2013.

Lowell General paid the most in bonuses and incentives, about $1.6 million, spread among 11 executives. Emerson Hospital paid about $1.1 million to six executives and Lawrence General paid $838,556 to four executives.

Incentives at Emerson, like other hospitals, are tied to more than financial indicators like profit and operating margins, Schuster said.

They are tied to the quality of care, recruitment of experts, and whether the hospital achieved certain program expansion goals, among other factors.

And beyond their personal financial incentives, the public should not forget that hospital executives do the job for more than just the paycheck, she said.

Schuster, for example, comes from a family of health-care professionals. She started working as a candy striper in the hospital when she was 13. She became a nurse before studying for a master's degree in business.

"By getting to the role of CEO one of the things I love about my job is making the lives of more patients and their families better," she said. "I didn't become a CEO to make lots of money."

Follow Todd Feathers on Twitter and Tout @ToddFeathers.

Top-paid area hospital executives

A look at the highest-paid regional hospital and system executives in 2014. The figures represent total compensation, not just salary.

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